Understanding Your Financial Statements

Working your business, selling your products and dealing with your clients, takes up the majority of a your time. And when it comes to accouting details... ie. information is entered into my accounting software and at the end of the month I get reports...  You may be wondering exactly what these reports are for and what are they trying to tell me?!

Well, to start... Your Financial Statements are not scary.

These essential reports help to spot problems within your business and identify ways to correct those problems. The most important reports are: the Balance sheet, Income Statement (profit and loss) and the Cash-Flow Statement.

Your Understanding of these statements is very important, because they tell you what has been happening in the past and what is going to happen in the future of the business.

The Balance Sheet is a listing of everything your company owns (assets) owes (liabilities) and the value of the ownership in the company (capital).

Assets = Liabilities + Capital

The Balance Sheet is also called a Statement of Financial Conditions, meaning it shows the financial positions of a company at a specific point in time.

The Income Statement answers the question “How did we do?” This report lists the different types of revenue (sales) and expenses that have occurred from operating your business during a given time. The difference between the revenue and expenses represents the net income of loss for the time period the report is run for.  The report can be run yearly, quarterly or monthly. The bottom line of this report is the bottom line of how your company did. 

Your Income Statement can be designed to show a comparison of this month vs. last month, last quarter vs. this quarter and/or last year vs. this year.  The comparison is just another tool to help you make educated decisons regarding the future of your business.

The Cash Flow Statement explains the change in the cash balance during the accounting period.

The items that increase cash are:

  • revenues collected
  • long term financing (money received from a loan)
  • sales of non current assets (sale of equipment)
  • an increase in current liabilities accounts (increase in accounts payable)
  • or a decreases in any current asset accounts

Uses of cash include operating losses, debt repayment, equipment purchases and increases in any current asset accounts. Having the information on the increase or decrease in cash is useful in warding off cash-flow problems. 

NOTE: A company that has net income may not have positive cash flow.
That is why it is very important to see where the cash is going!

Most business owners do not need to handle the day-to-day processing of accounting, which is fine if you have a bookkeeper or CPA that does it for you...

But... you must be able to review and understand the financial position your company is in... and that understanding comes from understanding your financial statements.